Legal advice on company law issues

The article provides legal advice on company law issues including breach of directors' duties, enforcement of constitution, and more. It discusses the relevant sections of the Corporations Act and common law cases to provide a comprehensive understanding of the issues. The article also highlights the importance of acting in good faith and for a proper purpose as a director of a company.

A. Whether OW is bound by the supply contract with Seedy Vineyards
In this question, Priya entered into a contract for the supply of grapes from Seedy Wineyards Pty
Ltd for $500,000. However it needs to be noted that Seedy uses a wide range of pesticides on the
grapes and they do not follow the principles of organic farming. On the other hand, a clause is
present in the Constitution of OW. According to which the activities of the company will be
restricted to organic farming of grapes.
In order to deal with the situations mentioned above, the common law has introduced the indoor
management rule. This rule was provided by the court in Turquand's case.1 It was provided by
this rule that it is available to the third-party presumed that all the internal rules concerning the
management of the company are complied with unless the other party has actual knowledge
regarding the non-compliance of such rule. Later on these provisions are also major part of the
Corporations Act, 2001. Hence, it has been provided by section 128 and 129 that any person who
is dealing with the company, is allowed by the law to make certain assumptions related with such
dealings. These assumptions have been mentioned in s129, and they are related to internal
procedures of the company to be complied with.
However, the other person is not allowed by the law to make such an assumption if the third
party has the knowledge or reason to suspect that such an assumption was not true. In this way,
when a third party is dealing with the Corporation, the person is allowed by the law to assume
that all the rules related with the internal procedures of cooperation have been complied with.2
Similarly, the third-party may also assume that any particular officer has been appointed in
1 Royal British Bank v Turquand (1856) 6 E&B 327
2 Clarke, P. and Clarke, J., 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd
Edition, Oxford University Press

accordance with the constitution of the company. In the same way, a document that is purported
to be signed by the director can be assumed to be signed in accordance with the company's
constitution. The result is that the end of management tools is not applicable any longer, but the
assumptions that have been mentioned in this rule are also mentioned in s129. The provisions of
Corporations Act, ranging from Ss 128 - 130 provide the assumptions that are available to third-
party companies while dealing with a Corporation. It is worth mentioning that these provisions
are apart from the provisions prescribed by the law of agency. The objective test that has to be
applied in this type of cases is mentioned in s128(4) for the purpose of seeing if the third-party
knew or had reason to suspect regarding the correctness of such assumption.
In the present case, Priya had been formally appointed as the managing director of OW for a
period of two years but after an initial appointment, she was not formally been appointed as the
managing director of the company by the board. However there are reasons to believe that Seedy
knew regarding the fact that Priya had exceeded her authority when entering into the contract
and moreover they were also aware of that agreement created by Priya was in breach of the
objects clause of OW. In the objects clause of the company, it has clearly mentioned that the
activities of OW will be restricted to organic farming of grapes and production of organic wines.
In this case it can be concluded that OW is not bound by the contract created by Priya with
Seedy.
B. Whether Ted can enforce the clause in the constitution appointing him as company
solicitor and what type of remedy would be applicable.
In this case, Ted, a solicitor friend of Raj and Alana was asked by them to draft the constitution
of the company. While doing so, Ted included a clause in the constitution of the company

according to which she was going to remain as the solicitor of the company and it would be
dismissed only for misconduct. Later on, Priya arranged for the appointment of Carl, was
recently admitted solicitor and also her boyfriend, as the company secretary of OW. A notice has
been served to Ted by Priya informing that OW does not require the services of Ted anymore.
Under these circumstances, the issue arises if Ted can enforce the laws of the Constitution
according to which we cannot be dismissed except in case of misconduct.
According to the law, the Constitution of the company is considered as a statutory contract that
has been created between the company and the members of the company. However, this contract
has remained the subject of much controversy and confusion for the last several decades. The
main controversies related with the question if the contract can be enforced by the members of
the company in order to ensure that the right associated with them in another role, can be
enforced by them.3 The constitution of the company has been provided contract enforced by
s140, Corporations Act. According to this section, the constitution of the company has to be
considered as a contract concluded between company and each member of the company, as well
as the company and its directors, the music during and between the members of the companies
themselves. It is possible to vary the constitution of the company by passing a special resolution
by the members of the company in a general meeting.4
The leading case related with the above-mentioned facts is that of Eley v Positive Government
Security Life Assurance Co Ltd.5 In this case, it was provided by the Constitution of the
company that Mr. Eley will remain the solicitor of the company. However, later on, the company
decided against employing Mr. Eley as the solicitor of the company.. However, he was a member
3 Khoury, D. and Yamouni, Y., 2010, Understanding Contract Law, 8th Edition, LexisNexis
Butterworths
4 Swanston, J., 1981, ‘Discharge of Contracts for Breach’, 13(1) Melbourne University Law
Review 69
5 Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 88

of the company but he decided to bring action in his capacity as the solicitor to enforce the
articles of the company. Under these circumstances, it was the decision of the courts that the
articles of the company did not result in a contract created between Mr. Eley and the company.
In the opinion of the Court, the provision cannot be enforced in such a way. The reason was that
Eley was trying to enforce the provision in his capacity as a solicit and not in his capacity as the
member of the company. Later on, this decision was further supported by the decision given in
Browne v La Trinidad.
In the present case also, if Ted wants to enforce a clause of the Constitution of the company,
according to which he cannot be removed from the post of the solicitor of the company except in
case of misconduct, in his capacity as a solicitor, it cannot be allowed by the law. The
Constitution of the Corporation is a contract created between the company and its members.
Therefore, Ted can enforce the laws only as a member of the company.
QUESTION 2
Advise Olive:
A. Whether Karim and Miles have breached s181 of the Corporations Act
According to section 181, the directors of the company are bound by a duty to act in good faith.
While applying this duty to the directors, the inquiry as to consider the intentions, beliefs and
motive of directors and if they have given primacy to the interests of the company has to be
made.6 On the other hand, a director can be held liable for the breach of this duty if the director
6 Cheffins, B.R., 1997, Company Law: Theory, Structure and Operation, Oxford, Clarendon
Press

has used his or her discretion of the powers for the purpose of achieving a personal advantage or
to confer benefit on a third party, shareholder or class of shareholders or cause loss to the
company itself. In this way, it is the duty of the directors to act honestly and in the interests of
the company. It is necessary that the directors should honestly believe that the particular action is
in the interests of the company. However such decision can be initiated by breach of the other
two elements of the duty, each one of which have objective content. Under these circumstances,
the director required to exercise their powers for the purpose for which such powers have been
granted to them.7 As a result, the courts may invalidate the decisions taken by the directors where
the motivating purpose behind such decision is one which allows the court to consider as beyond
those decisions for which the power conferred to the directors may be legitimately exercise or if
the decision is not for the benefit of the company.
After going through the facts of this question, it can be stated that Karim and Miles can be held
liable for the breach of the duties imposed on them by section 181. The reason is that in this case,
Karim and Miles have taken the decision to refuse to register the transfer of shares so that they
may purchase these shares later on at a lesser price. In this way, it can be stated that these two
directors of OW have not acted in good faith. In such a case, s1071F, Corporations Act provides
that if the directors of the company refuse all failed to register the transfer of shares, such party
may apply the court seeking an order under this section.
B. Whether she has an action against Miles for a breach of directors’ duties for his
purchasing the shares without telling her of the improved prospects of the company
7 Jordan, C., 1997, ‘Towards a Commonwealth Model of Companies Law’ in Fiona Macmillan
Patfield (ed), Perspectives on Company Law: 2 289

Duties are being prescribed for the directors in Australia by the common law, said the law and
also by the Constitution of the Corporation. In this regard, the, law provides that it is the duty of
the directors that they should work to ask for an improper purpose. This includes obtaining your
personal advantage, by the directors or debating the voting power of the present shareholders by
creating new majority. Among the statutory duties of the directors, s181 describes the duty to act
in good faith. The result is that the directors of the corporation should use their powers and
discharge their duties in good faith and for a proper purpose. At the same time, it has been
prescribed by section 182 that it is the duty of the directors that they should not make improper
use of their position. Consequently, the directors would not use their position improperly for
achieving your personal advantage or for someone else or, in order to cause loss to the company.
Any director who breaches the provisions of this section by involving in conduct with the
intention and purpose of achieving your personal advantage or for causing a loss to the company,
it is immaterial if such benefit all loss was caused in reality or not.8 Similarly s183 imposes a
duty on the directors according to which they should not improperly use the information received
by them as a result of their position in the company. Therefore, when a director receives any
information due to the result of their position, such directors should not use the information in
properly in order to achieve a personal advantage or to cause a loss to the company. It will be
considered by the law that the director has breached section 183 with the director is involved in
conduct with the intention of achieving your personal advantage or to cause loss of the company
even if such benefit or advantage has not taken place in reality.
In the present case, if Miles had failed to inform Olive regarding the improved prospects of the
company and purchase her shares at a lesser price, it can be stated that Miles is responsible for
8 Goddard, D., 1998, ‘Company Law Reform — Lessons from the New Zealand Experience’ 16
Company and Securities Law Journal 236

the beach of his duties as the director of OW. The reason is that in this case, Miles was involved
in conduct the review to achieve a personal advantage for him. The advantage was to purchase
her shares at a lesser price even if he was aware of the improved prospects of OW

References
Cheffins, B.R., 1997, Company Law: Theory, Structure and Operation, Oxford, Clarendon Press
Clarke, P. and Clarke, J., 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd
Edition, Oxford University Press
Goddard, D., 1998, ‘Company Law Reform — Lessons from the New Zealand Experience’ 16
Company and Securities Law Journal 236
Jordan, C., 1997, ‘Towards a Commonwealth Model of Companies Law’ in Fiona Macmillan
Patfield (ed), Perspectives on Company Law: 2 289
Khoury, D. and Yamouni, Y., 2010, Understanding Contract Law, 8th Edition, LexisNexis
Butterworths
Swanston, J., 1981, ‘Discharge of Contracts for Breach’, 13(1) Melbourne University Law
Review 69
Case
Royal British Bank v Turquand (1856) 6 E&B 327
Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 88
Legislation
S 129, Corporations Act, 2001 (Cth)